No other investment offers the same tax benefits as paying pension contributions and all UK residents under the age of 75 are entitled to claim.
Are you claiming your share whist planning for your retirement?
£35 billion a year contributed
Every year the government contribute over £35 billion in tax relief on personal pension payments which reduces the tax liability of millions of UK residents.
There really is no other investment vehicle quite like it and with the Pension Reform coming in from April making pensions more flexible in terms of how investors can withdraw their funds, it is something for everyone to consider.
Tax planning and retirement planning work hand in hand: 5 benefits
1) Up to 45% tax relief
Depending on what tax bracket you fall in will depend on the level of tax relief available to you. A top rate tax payer contributing to a pension can receive up to 45% tax relief.
2) It can save you paying higher rate tax
Pension contributions can be especially beneficial if your earnings are just pushing you into the higher rate tax bracket. Money you would be paying in additional tax, crossing from 20% to 40% (15/16) can be contributed to the pension instead and be benefiting the pension pot, rather than HMRC!
3) Free of UK Income Tax and Capital Gains Tax (CGT)
The money in your pension can grow without an impact on Income Tax or Capital Gains Tax, another unique benefit of saving within a pension.
4) 25% tax free withdrawals of pension funds
New regulations are in force from April 2015, meaning that pension funds can be drawn from age 55 and up to 25% of this can be taken as a tax free lump sum.
Find out more: Flexible Pensions in 2015
5) Children and non tax payers can also claim tax relief
Yes, it’s a great additional benefit that even if you don’t pay tax, tax relief can be claimed. Particularly useful if you want to help your family save for their retirement too in a tax efficient way.
How the tax relief on pension contributions works
Basic rate
Pension contributions made within the year are automatically given tax relief at the basic rate of tax, 15/16: 20%.
As an example, if contributions to the value of £8,000 were invested into a pension, 20%, or £2,000, would be contributed by the government meaning an overall injection to the pension pot of £10,000.
Higher rate
Taxpayers who fall into higher rate tax can claim an additional 20% tax relief on pension contributions through their tax return.
It effectively means an extension to the “basic rate tax band” as the 40% income tax rate is discounted by 20%.
Therefore, to gain a pension injection of £10,000 can cost the tax payer just £6,000.
Top rate
Those taxpayers who fall into top rate tax can claim an additional 25% tax relief through their tax return so a pension injection of £10,000 can cost just £5,500.
How to claim your share of tax relief on pensions
Working with a financial adviser means the details can be explained and the paperwork taken care of.
The first step is to set up of a Self Invested Personal Pension (SIPP) – this type of pension is designed to offer control for investors and they benefit from low costs and high service levels too.
The next step is to make a contribution, the following applies:
- Generally, you can make pension contributions and claim tax relief to the value of your earnings. For example, if you earn £35,000, a payment of £28,000 can be made to a personal pension added to the government contribution at 20%, so £7,000, equals £35,000 investment.
- Non tax payers can contribute up to £3,200 gross, so a payment of £2,880 and they will receive £720 in tax relief, even though they don’t actually pay tax!
- There are ways to contribute more than you earn – speak to your financial adviser about this as advice is bespoke.
Pension planning is most effective as a long term investment plan
Pension planning is more effective as a long term investment. It’s always worth remembering the value of investments can go up and down – there is always a change you may get back less than you invest but if managed over the longer term then peaks and troughs can usually be ironed out.
Dental & Medical Financial Services help hundreds of doctors and dentists every year with setting up and managing SIPP’s. The majority of our clients will use pension investments as part of effective tax planning and retirement planning. Call today to claim your share of tax relief.
Tel: 01403 780 770